The Square Foot

LaSalle to Launch Property Derivatives Unit

LaSalle, which manages about $40bn (£25bn) of global real estate, has reached an agreement with BGC Partners, a global intermediary to the wholesale market, to set up a property derivatives capability for its clients for the first time.

Using its relationship with BGC, LaSalle’s fund managers will execute and monitor trades where they see added value. LaSalle said that there were clear long-term benefits to property derivatives, which allow investors to buy or sell exposure to specific parts of the property market without buying the physical buildings.

However, the derivatives market has been slow to grow in the UK, with 2010 the quietest for five years, according to IPD’s global property derivatives trading volumes.

The market was also dealt a blow last week after Icap, the interdealer broker, said it would pull its property derivatives business. It blamed the slow pace of the market’s development.

Traders were quick to point out the involvement of new investors – such as LaSalle – was more significant than the departure of a broker. There are other fund managers also considering using derivatives in their trading strategies for the first time, including CBRE Investors, joining established investors in the market, such as Prudential and Grosvenor. Traders also said that the first two months of the year were much more positive.

LaSalle’s fund managers will be able to actively manage portfolio sector weightings, asset allocation and to hedge market downside risk.

Alan Tripp, UK managing director of LaSalle, said: “We do not believe that property derivatives will replace investment in direct real estate, but rather that they will equip fund managers with another risk and portfolio management tool.

“There appears to be appetite for this sort of diversified strategy. Initially LaSalle’s focus will be on the UK property derivatives market, but in setting up the internal processes we have ensured the flexibility to expand the geographic coverage over time,” added Mr Tripp.

LaSalle said it saw several benefits to derivatives, which can be used tactically to move portfolios towards favoured sectors or away from those expected to underperform in the short term, with reduced performance drag from the trading costs using the direct market.

They can also help to address overweight exposures to sectors, negating the need to sell assets that an investor may wish to retain for the long term.

Hedging can be used to mitigate the impact of falling market values by selling a derivative on an index when it is expected to fall.